post by Paul Kelleher
In "Just in Case: How Reform Might Survive Without the Mandate," Jon Cohn writes:
Without a mandate, wouldn't healthy people stop getting insurance, since they could always buy it once they get sick? [...]
But some people choose not to get insurance because it seems (and frequently is) too expensive, at least relative to the benefits they'd get. If your household income is $40,000 a year and the annual premiums for family coverage add up to $12,000, with huge out-of-pocket costs and gaps in coverage, why would you bother? The law's subsidies and, to a lesser extent, regulations on benefits should alter that calculus: Coverage will start to seem like a much better deal and many of these people will start buying. The net effect will be to bring many more people into the insurance pool, many of them relatively healthy, making it possible for insurers to spread the cost of high medical bills more broadly and keep costs down.
Just to be clear, striking the mandate would introduce a new element of uncertainty into health care reform: Nobody has ever tried a system with generous subsidies but no mandate.
This is precisely the sort of system that Mark Pauly, the so-called "father of the mandate," appears now to endorse. In Health Reform Without Side Effects, published just after the ACA passed in 2010, Pauly writes:
The point here is that a subsidy does more than increase the takeup at a given loading [where "loading" is the difference between total premiums paid and total benefits received]; it actually permits a dramatic reduction in loading itself because it reduces the cost of persuading people to take coverage. Subsidized insurance is more efficient with regard to administrative cost because of a kind of self-fulfilling prophecy: by making premiums more attractive, selling costs can be lowered, but at lower selling costs, attractive premiums can eventually become financially feasible. This powerful point, which I believe is not well recognized either in the health policy or the insurance economics literature, has two important implications, one fairly obvious and the other less so.
The obvious implication is that with a subsidy, the specific administrative arrangement for insurance becomes both less important and less of a factor in takeup. For example, the Massachusetts Connector may well have relatively low administrative cost, but so would almost any other way of administering insurance given that state’s large subsidy to people with incomes below 300% of poverty and its penalty for uninsurance to others. It is not the whole bundle of features of a high-performance (and high-regulation) health system that lowers individual insurance administrative cost; the active ingredient is the subsidy. [...]
The less obvious point is that lowering price with a subsidy might even lower administrative costs so much as to eliminate (or at least greatly reduce) the need for a subsidy. More formally, there may be a break-even equilibrium at a low insurance premium with high volume, but markets may currently be trapped in another equilibrium with high premiums and low volume.
I highly doubt the second point would pan out for the robust plans that the ACA envisions everyone having affordable access to. But then again, Pauly doesn't want to engineer a system in which everyone has plans at least that robust. He would prefer more scope for personal preference than that. Still, his hypotheses about the virtuous "self-fulfilling" nature of subsidies seems something to think about as we move closer to a Supreme Court decision on the ACA.